Can Nonprofits Get Marijuana Licenses and Tax Breaks?

If for-profit marijuana businesses face serious tax penalties because they can't deduct certain expenses, what about nonprofits?  Should nonprofits get federal 501(c) tax status if they engage in things that are illegal under federal law?

I don't know, but that's a question raised by this story out of Illinois, where a for-profit business is suing to stop a nonprofit from exploiting one of the state's licenses, claiming that it's improper for a tax-exempt group to get a sales monopoly on an illegal product. 

    A medical marijuana business is facing what's believed to be the first legal challenge in Illinois to its license to operate..

    A downstate corporation that lost out on the license argues that Shelby County Community Services Inc. is ineligible to cultivate medical marijuana because it is a not-for-profit entity, and therefore must pledge not to violate federal law.

    A state law that took effect last year authorizes production and distribution of marijuana for patients with any of about three dozen illnesses. It remains illegal under federal law, though federal authorities have stated generally that they won't prosecute businesses that comply with state laws.

    Shiloh Agronomics LLC, which is challenging the license, was formed by owners of a family farm in downstate Edgar County, including former County Board Chairman and Sheriff James Sullivan, according to his son, Chicago attorney Jude Sullivan. It sought the cultivation license awarded to Shelby County Community Services in District 10, which includes Champaign and nearby counties.

    Shiloh Agronomic's attorney, Sean Britton, sent a letter to the Illinois attorney general on Monday asking the office to take action to revoke the license, a precursor to the company pursuing the matter in court. The attorney general's office did not immediately comment Tuesday on the request.

    "It seems to me the state shouldn't be able to create a monopoly for someone who is tax-subsidized," Jude Sullivan said.

    Shelby County Community Services in Shelbyville offers residential and out-patient programs for developmentally disabled individuals. Formed in 1975, it puts its clients to work at its own plastic bag and paper plate manufacturing plants, and hopes to do the same with the cultivation center, Executive Director Tom Colclasure said.

    The agency also counsels substance abusers, but Colclasure sees no contradiction in that, emphasizing that medical marijuana is tightly controlled and only for therapeutic purposes for patients who are authorized by doctors. The cultivation center would also help fund the agency's $14 million annual budget in the face of tight state funding, he said.

    "That was our motivation," Colclasure said. "It met with our mission of helping people and also provide jobs to people with disabilities."

    In some states, the laws encourage not-for-profits to run medical marijuana facilities, to avoid the appearance of the industry being driven by profits, said Chris Lindsey, legislative analyst for the Marijuana Policy Project, a lobbying group.

    Internal Revenue Service regulations state: "If (a not-for-profit) organization engages in illegal acts that are a substantial part of its activities, it does not qualify for (tax) exemption."

    However, while medical marijuana businesses generally do not qualify for not-for-profit tax exempt status, that is a separate issue from qualifying to receive a license to operate, according to Robert McVay, an attorney who specializes in marijuana law.

    Many not-for-profits operate medical marijuana licenses in other states, he said, though they typically must pay exorbitant taxes because the IRS does not allow standard business deductions for federally prohibited activities.

This probably won't be the last challenge, given that many states give strong preferences to nonprofits in the medical marijuana arena.  One obvious question is whether a 501(c) that sells marijuana loses the tax-deductibility of its contributions.